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TMI Blog2002 (12) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... revious year being the financial year ending on March 31, 1995. The appeals before the Tribunal were heard by a Bench comprising three members, namely, Vice-President and two Judicial Members. The Vice-President by a separate order had dismissed the appeals of the appellants. The two Judicial Members while agreeing with the final conclusion drawn by the Vice-President have written their separate order by giving reasons of their own. The impugned order of the Tribunal had been passed in eight appeals preferred by the eight assessees. These assessees are the erstwhile partners of a dissolved firm which was carrying on the business of manufacturing beedies under the firm name Mangalore Ganesha Beedi Works (in short the "MGBW"). The firm was comprised of thirteen partners. It stood dissolved on December 6, 1987, by efflux of time. Thereafter, the business was carried on behalf of all the erstwhile partners as an association of persons till the affairs of the firm were finally wound up. The assets of the firm were ultimately sold under the orders of this court in winding up proceedings with effect from November 21, 1994. Before entering into the facts in detail, we find it advanta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not permissible in law. It is for this reason that both the assessees and the Department have preferred these appeals. About the firm: Some time in 1939, the late S. Raghuram Prabhu started the business of manufacturing beedies. Subsequently, his brother-in-law, Sri Madhav Shenoy also joined him in the business as a partner. Thus, Mangalore Ganesha Beedi Works, the firm, came into existence with effect from March 28, 1940. Thereafter, it was reconstituted from time to time. The last reconstitution of the firm is evidenced by a partnership deed dated June 30, 1982. According to the averments made in the deed, the last reconstitution of the firm became effective from June 6, 1982. According to the deed of partnership, the firm comprised the following 13 partners: Sl. No. Name of the partners Percentage of share 1. B. Raghurarna Prabhu 14.50% 2. M. Janardhana Rao 7.65% 3. M. Ananda Rao 7.65% 4. M. Vinoda Rao 7.50% 5. M. Pushpalatha, W/o. Subraya Baliga 12.50% 6. Hemalatha, W/o. Raghunath Shenoy 12.50% 7. M. Suresh Rao 7.55% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or as a single group at a sale to be then held as among the partners at which sale nobody other than the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deeds, instruments and applications and otherwise aid him/her or them for the registration his/her name or their names of all the said trade marks and do all stich deeds, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners." Winding up of the firm by sale of its assets: It is a matter of record that despite dissolution of the firm, because of differences between the erstwhile partners, the affairs of the firm could not be wound up. So two of the partners of the firm filed a petition before this court under the provisions of Part X of the Companies Act, 1956, for winding up of the affairs of the firm in terms of section 583(4)(a) thereof. This petition was numbered as Co. P.No.1 of 1988. By order dated November 3/5, 1988 this court permitted the group of partners (7) having controlling interest to continue the business as an interim arrangement till the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... framed by this court, several partners either individually or in groups offered their bids. The bid offered by an association of persons comprising three partners, namely, M. Vishwanath Rao, M. Jaganath Shenoy and M. Gopinath Shenoy (hereinafter referred to as the" AOPs-3") was found to be the highest being of Rs. 92 crores. Therefore, it was accepted by this court vide its order dated September 21, 1994. The said order was to the following effect: "The highest bid amount of rupees ninety two crores is accepted and the group of persons offering the said amount are directed to deposit within 60 days from today with the official liquidator the entire amount of rupees ninety two crores together with actual profits earned from December 6, 1987 till March 31, 1994 and proportionate profit from April 1, 1994, till the date of deposit in terms of the orders of this court earlier issued in C.A. No. 313 of 1994." At the instance of the three partners offering the highest bid, clause (1) of the order dated September 21, 1994 was amended by a subsequent order dated September 19, 1994. The modified clause (1) of the order dated September 21, 1994 reads as under: "The highest bid amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the partnership had been continued even after June 13, 1987 (sic December 6, 1987) by mutual consent in the same manner as it was being carried on before the expiry of the term of the partnership." Keeping in view the sequence of the events as noticed above, it is quite clear that after the dissolution of the firm, its business was continued by an association of persons comprised of all the erstwhile 13 partners by using the assets as well as the name of the dissolved firm. Therefore, till the date of dissolution, the name "Mangalore Ganesha Beedi Works" was exclusively of the partnership firm. Whereas, after the dissolution, it became the name of the association of persons (i.e., AOPs-13) comprised of all the erstwhile partners of the dissolved firm, as well. Assessment of business income: The income of the business for the period subsequent to dissolution of the firm from December 19, 1987, till up to the assessment year 1994-95 was all through returned as income of the AOPs-13 and was accepted as such by the Department. Despite this fact, the Assessing Officer took the view that (i) the assessees were liable to pay capital gains tax on their respective shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till November 20, 1994, was assessable in the hands of its members?" Question No. 1: Before proceeding to answer this question, one has to bear in mind that "partnership" as defined in section 4 of the Indian Partnership Act, 1932 is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. This relationship may have many other attributes as agreed between the parties and are recognized under the Partnership Act. So far as relationship in association of persons is concerned, it has not been defined in any statutory provision. But the Supreme Court in the case of N.V. Shanmugham and Co. v. CIT [1971] 81 ITR 310 has held that "association of persons" as used under the Income-tax Act means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one, the object of which is to produce income, profits or gains. Now the questions that arise are (i) whether the partnership can own properties? and if so, then (ii) whether on its dissolution it ceases to hold the said properties and the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise: Provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent" In the case of Saligram Ruplal Khanna v. Kanwar Rajnath, AIR 1974 SC 1094, keeping in view section 47 of the Indian Partnership Act the Supreme Court has held that: "... According to section 47 of the Indian Partnership Act, 1932, after dissolution of a firm, the authority of each partner to bind the firm, and other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution but not otherwise. The word 'transaction' in section 47 refers not merely to commercial transaction of purchase and sale but would include also all other matters relating to the affairs of the partnership. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d among the partners, the firm continued to be in existence despite its dissolution as envisaged under section 47 of the Partnership Act. Further, the records dearly spell out that none of the partners of the firm had either retired or relinquished their share in the assets of the firm during its subsistence till it was finally wound up. It is well settled that the firm is treated as an entity distinct from the persons who constituted the firm. In the case of Bist and Sons v. CIT [1979] 116 ITR 131 (SC), it has been held that: "It may be, as is quite often said, that a firm is merely a compendious description of the individuals who carryon the partnership business. But under the Income-tax Act, a firm is a distinct assessable entity. Section 3 of the Indian Income-tax Act, 1922 treats it as such, and the entire process of computation of the income of a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners: CIT v. A.W. Figgies and Co. [1953] 24 ITR 405 (SC)." In the above view of the matter, we are of the considered opinion that the capital gains can be assessed only in the hands of the firm, which is a disti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., November 20, 1994. In the present case, the firm was dissolved on December 6, 1987 and its affairs were finally wound up on February 2, 1995, when the sale proceeds had been distributed amongst the present assessees. It is not a case of retirement or surrender of interest of any of the partners of the firm. Re: Question No.3: From the facts hereinbefore noticed and the law on the subject, it is quite evident that in this case, the assets of the firm had been sold to an association of persons comprised of 3 partners, who were found to be the highest bidders in the auction held by this court. As of fact, the scheme for sale which was formulated by this court, under its order dated June 14, 1991, in Co. P. 1 of 1988, was not strictly in accordance with clause (16) of the partnership deed though care was taken that the right to purchase the assets of the dissolved firm should go to the partners on priority basis. But, clause (3) of the scheme very clearly provided that if the partners' offers are not found to be acceptable then the court may invite offers from the public as well by making publicity in the newspaper. From the scheme framed by this court, it was quite clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise of first depositing even their share in the sale consideration and the profits and then seeking repayment of the same. This court accepted the request clearly to avoid multiplicity and catering to the convenience to all concerned. By such an arrangement, no inference can be drawn that there was no sale of assets of the firm to the extent of the shares of the purchasing partners in such assets. Re: Question No.4: In the present case, admittedly, the assets of the firm as a going concern were sold for a consideration of Rs. 92 aares without expressly specifying the value of the individual assets of the firm which included lands and buildings, plant and machinery and the goodwill. Therefore, in a traditionally and judicially accepted sense the transaction can be said to be a slump sale. But, neither the Income-tax Act nor any judicial pronouncement declares that where sale of the assets is made for a lump sum consideration, it cannot be subject to tax under the heading "Capital gains". The law is that if individual assets can be reasonably valued for ascertaining their respective cost of acquisition, then by resorting to statutory parameters and mode of calculation devised u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated. as the business is carried on and may be augmented with the passage of time." In the above case, the Supreme Court after closely analysing the provisions of the then existing provisions in the Act for computation of capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase the goods taking it to be of required quality as having been manufactured or supplied by the owner of such goods. Therefore, trademark symbolises the business reputation or goodwill of its owner and--becomes an integral part thereof. Though a catena of decisions have been brought to our notice, like in the case of CIT v. Artex Manufacturing Co. [1997] 227 ITR 260 (SC), CIT v. Electric Control Gear Manufacturing Co. [1997] 227 ITR 278 (SC) and the earlier cases referred to therein which all related to sale of business as a going concern and the sale of assets by way of realisation sale, but in none of these cases, it has been held by the Supreme Court that goodwill cannot be independently valued for the purpose of capital gains. Shri Udaya Holla, the learned senior advocate, appearing for the interveners, has submitted that the firm was employing specially blended tobacco in manufacturing its beedies and this know-how was an asset of the firm. In our opinion, even if it be taken to be so, this know-how can be presumed to be known to all the partners and the employees assigned with the job of blending of the raw materials. Nothing has been placed before us to show that ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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